The math of money in freemium

Last month I was struck by Going broke with success, the story of financial disaster for indie devs Mikengreg, the developers behind well regarded iPad app Gasketball. As told by the Penny Arcade Report, it is a heartbreaking story of two passionate devs dedicating two years to a project only to get completely wiped out financially despite hitting the #2 position on the iOS free charts in the US and #1 in 6 countries. Two years, a fun, polished, unique multiplayer game with a great trailer and yet Mikengreg are homeless because Gasketball failed to convert enough players to payers.

I believe that Gasketball’s struggles can teach game developers considering freemium three important lessons:

  • Big funnels drive big profits
  • Don’t cap a player’s ability to spend
  • Control your scope

After spending so much time speaking publicly about free to play game design, I wanted to write about the math behind doing a freemium game. I wanted to highlight these three key lessons, shedding light on the 2% conversion rate the developers were counting on.

The article cites 200,000 downloads and a 0.67% conversion rate on the game for a single, $2.99 purchase that unlocks the full game. This means $2,804 in pre-tax profits from 1,340 players after Apple takes its 30% cut. This is a stark contrast to the 5,000,000 downloads and 2% conversion rate Mikengreg were hoping for, according to the article. This would mean $209,000 pre-tax, or just over $52,000 a year per developer.

  • Players = 200,000
  • Payers = 1,340 (200,000 players * 0.67% conversion)
  • Sales = $4,006 (1,340 payers * $2.99 price)
  • Take home = $2,804 ($4,006 sales * 70% developer cut)

These devs were not hoping to get rich. Their target compensation was far below the industry average salary of just over $80k in 2011. Like most indies, these devs were hoping to make a living doing what they loved.

Before joining BioWare, I spent time designing casual, downloadable PC games like Diner Dash and Jewel Quest Mysteries for publishers PlayFirst and iWin. These games employed a try before you buy model. On average, the player would get to play for an hour before we asked for $20 to unlock the full game, similar to the Gasketball model or the classic, shareware model. Since I spent time internally consulting on titles that we were publishing, I had access to a lot of data on this sales model.

We too talked used the mythical 2% benchmark, but in reality, the games that converted 2% of players to payers were probably the biggest hits of the year. A conversion rate of 1% generally made for a hit game, and a game converting between 0.6% and 0.8% was a B level game that likely made back it’s development budget and a small profit (depending on scope of the game).

For illustration’s sake, let’s say I wanted to achieve Mikengreg’s target sales ($209k) after producing a game with the same conversion rate (0.67%). If I was only able to effect price, I would need to sell the game for $225.00:

  • Players = 200,000
  • Payers = 1,340 (200,00 players * 0.67% conversion)
  • Sales = $301,500 (1,340 payers * $225.00 price)
  • Take home = $211,050 ($301,500 sales * 70% developer cut)

If I could only boost downloads, I would need 15 million of them:

  • Players = 15,000,000
  • Payers = 100,500 (15,000,000 players * 0.67% conversion)
  • Sales = $300,495 (100,500 payers * $2.99 price)
  • Take home = $210,246 ($300,495 sales * 70% developer cut)

I think that 0.67% is a respectable conversion rate; I’ve certainly contributed to games which have done a worse job of turning players to payers. Which brings me back to my three lessons.

Big funnels drive big profits
As you can see from my back of the envelope math, freemium requires a lot of users to enter the “top of the funnel” to turn into a small amount of payers at the bottom of the funnel. Here, the funnel is measured as the experience from downloading the game to reaching the end of free content. There are three major aspects to your profit: number of players, conversion rate, and lifetime value (LTV) of payers. No matter what your conversion rate or LTV is, you will need a lot of players to generate a lot of profit.

Don’t cap a player’s ability to spend
For Gasketball, the maximum possible lifetime value of a player is $2.09 after Apple takes its cut. But at its cited conversion rate, the LTV of each player is currently at $0.014. Without additional in app purchases, Mikengreg’s only path to increased profit is more users or a higher conversion. At an LTV of $0.014, it is impossible to make money acquiring users through advertising, so all new users must be earned with PR and word of mouth, not bought. Conversion rate can increase with updates, and in the past month it is clear the devs made changes in hopes of improving conversion. But in my experience, conversion is hard to move more than a few hundredths of a percentage point. They might be able to go from 0.67% to 0.75%, but are unlikely to hit the prophesied 2% conversion rate.

The mistake here is capping the player’s ability to spend. If you look at hit games like Temple Run, a player’s potential LTV is unlimited. A wealthy player could purchase a consumable utility like Mega Boost at the start of every round of play. This means that without adding any additional content to the game, the developer has allowed for the possibility of unlimited spending. Features like consumable boosts would have raised the potential LTV of Gasketball above the anemic $0.014 they are currently suffering from.

Control your scope
When you are an indie, controlling the scope of your game is one of the hardest parts of the job. You are clearly in it for the passion and love of games. If you were in it for the money, you would probably be writing accounting software or something. And when you’re driven by passion, you are naturally the type of person willing to work long hours seven days a week for two years on end. But you have to be realistic about the math. $209,000 of sweat investment is hard to make back, especially when you don’t have the resources to do large scale promotion once the game is released.

Closing thoughts
If you are reading this article, there’s a good chance you have an iPad and $2.99 in disposable income. So skip your next coffee from Starbucks and go buy Gasketball. Support Mikengreg, two devs who made a fun game and are only trying to do it right by the player.

If you are reading this article, there’s also a good chance you make games. If you are making a freemium game, or considering making a freemium game, then spend a few hours with Google’s free spreadsheet tools and do some business modeling. Be realistic about your potential for getting downloads, converting players to payers and LTV. Be idealistic with your design, but be realistic with your bank account. Ask yourself “what does this game need to accomplish to be successful? How much money can I hope to make?”

Ask yourself “how much game can I afford to build?”